Advisory Misconduct in Mutual Funds: Investor Reactions, Capital Flows, and Governance Responses
Keywords:
Investor flows, Investor monitoring, Mutual fund misconduct, Financial regulation and complianceAbstract
We evaluate the investor flows and company responses following mutual fund advisory misconduct from 2000 to 2015. An average 31.25% reduction in monthly fund flows occurs one year after misconduct, and the effect increases with investor monitoring. Additional analysis shows that sentiment-driven flows and disclosure-related misconduct mainly drive the negative effect. In response, mutual funds reduce contractual incentives, impose investment restrictions, increase liquid assets, or even replace malfeasant advisors. These measures alleviate the adverse effects of misconduct. Overall, our study highlights the impact of misconduct on investor flows and on the development of responsive policies in the mutual fund industry.
JEL Classification: G02; G23; G28.
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